New Evidence on the Money's Worth of Individual Annuities

Olivia Mitchell, James Poterba and Mark J. Warshawsky

No 6002, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper presents new information on the expected present discounted value of payouts on individual life annuities. The annuity we examine is the single premium immediate life annuity, an insurance product that pays out a nominal level sum as long as the covered person lives, in exchange for an initial lump-sum premium. This annuity offers protection against the risk of someone outliving his saving, given uncertainty about longevity. For reasonable estimates of behavioral parameters, we calculate that individual annuities are currently priced so that retirees without bequest motives should find these policies of substantial value in configuring their portfolios to smooth retirement consumption. We also find that the expected present discounted value of payouts, relative to the initial cost of the annuity, has increased over the last decade. These findings bear on the policy debate regarding the role of individual choice and self-reliance in retirement planning.

JEL-codes: D91 J14 (search for similar items in EconPapers)
Date: 1997-04
Note: AG AP PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

Published as American Economic Review, vol. 89, no. 5 (December 1999): 1299-1318.

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